Oil industry faces downturn; cuts spending, make job cuts

The world's top oil companies have struggled to cope with the halving of oil prices since June 2014. They have cut spending repeatedly, made thousands of job cuts and scrapped projects.Reuters | Updated: October 30, 2015, 08:30 IST

LONDON/HOUSTON: The oil sector is slipping into the red after years of fat profits as the steep slump in oil prices shows little sign of ending, with this quarter shaping up to be the worst since the downturn started.

The world's top oil companies have struggled to cope with the halving of oil prices since June 2014. They have cut spending repeatedly, made thousands of job cuts and scrapped projects.

The lower-for-longer outlook for oil prices took its heaviest toll yet in the third quarter as oil companies again reported a dramatic drop in income. Some saw results swing into the loss column, and the industry had billions of dollars in impairment charges.

"It is slowly going to claw its way back into the black through cost-reduction efforts, but that will take time. It will depend on price movements, but it will take time to get all these cost savings through the system."

Even after cost efficiencies and spending cuts, European oil companies on average will require an oil price of around $78 a barrel in 2016 to cover spending and dividend payments, according to Jefferies estimates before the latest results.

Analysts polled by Reuters expect Brent crude to average a much lower $58.60 a barrel in 2016.

Shell, which Jefferies says has the lowest cashflow breakeven point at around $66 a barrel, said it would axe 1,000 additional jobs after the 6,500 job cuts announced earlier this year.

MORE DEBT

Companies are also tapping the debt market, benefiting from a relatively low debt ratio that will allow them to cover spending and dividend payments that, except for Eni, have remained unchanged.

Britain's BP increased its debt ratio to 20 per cent from 15 per cent a year ago after agreeing in July to pay $20 billion in fines relating to the 2010 Gulf of Mexico oil spill.

Europe's majors have reduced 2015 spending programmes about 15 per cent to near $107 billion, and more cuts are seen next year.

On Tuesday Norway's Statoil posted worse than expected third-quarter core earnings and said it would slash capital expenditure further.

Results have been bolstered somewhat by gains in refining and trading segments, as lower prices lifted global fuel demand, though this boost is expected to fade with the seasonal winter drop in demand.